Share This Story!

Ask Matt: Is Wall Street rigged?

Q: Why should investors "trust the Wall Street system" when it seems so rigged? A: Investors have plenty of reasons to distrust Wall Street. And some figure it's best to just ignore stocks rather than get fooled.

Q: Why should investors "trust the Wall Street system" when it seems so rigged?

A: Investors have plenty of reasons to distrust Wall Street. And some figure it's best to just ignore stocks rather than getting fooled again.

It's understandable that investors are so down on stocks. It's been a rough time for Wall Street credibility since 2000. There have been massive accounting frauds, including Enron; several market crashes, including the inexplicable flash crash of 2010; not to mention allegations of crooked analyst recommendations. These factors, magnified by the rise of split-second computerized trading, have led some investors to throw up their hands in disgust.

Investors have some legitimate gripes with Wall Street. But investors also need to understand there's a big difference between how stocks behave in the short run vs. the long term.

In the short term, stocks trade up and down based on fleeting factors powered by speculation and imbalances between the supply of shares and the demand. Speculation can ebb and flow based on the short-term feelings of investors and their sentiment. But over the long term the effects of speculative moves get washed out. Things such as the company's size and valuation are overwhelmingly more important determinants of how a stock will do, studies have shown.

Investors need to remember that when they buy stock, they're buying a claim to a company's future earnings and cash flow. Investors may disagree in the short term how much a company and its stock is worth. And that disagreement leads to short-term ups and downs. But over time, the driving factors that set the value of a stock are its valuation and size.